Steep Drop In Inventories Results In Weaker Than Expected Q1 GDP

By IBT Staff Reporter On 04/29/09 AT 9:17 AM

While consumer spending rebounded in the first three months of the year, a report from the Commerce Department released on Wednesday showed that its advance reading on first quarter gross domestic product contracted by much more than expected.

The report showed that GDP decreased at an annual rate of 6.1 percent in the first quarter compared to a 6.3 percent drop in the fourth quarter. Economists had been expecting a more modest decline of about 4.7 percent.

A steep drop in private inventories played a big part in the sharper than expected contraction in GDP, with the drop in inventories subtracting 2.8 percentage points from first quarter GDP. The value of private inventories fell by $103.7 billion during the quarter.

Excluding the decrease in inventories, first quarter GDP showed a much more modest 3.4 percent decline compared with a 6.2 percent decrease in the fourth quarter.

Peter Boockvar, equity strategist at Miller Tabak, noted, The huge inventory drawdown will be reversed to some extent to the upside, thus helping economic activity.

The substantial decline in inventories helped to offset a rebound in consumer spending, which rose by a bigger than expected 2.2 percent in the first quarter after falling by 4.3 percent in the fourth quarter and 3.8 percent in the third quarter.

Consumer spending on durable goods jumped 9.4 percent in the first quarter following a 22.1 percent decrease in the previous quarter. Spending on non-durable goods rose 1.3 percent, while spending on services increased by 1.5 percent.

Nonetheless, the report also showed negative contributions from exports, equipment and software spending, non-residential construction, and residential fixed investment. A downturn in federal government spending also contributed to some weakness in the quarter.

The Commerce Department also said that motor vehicle output subtracted 1.36 percentage points from the first-quarter change in GDP, although that represents a decrease from the 2.01 percentage points subtracted from the fourth-quarter change.

Additionally, the report showed that the GDP price index rose 2.9 percent in the first quarter after edging up 0.5 percent in the fourth quarter. Economists had expected the index to rise 1.8 percent.

While consumer prices fell 1.0 percent in the first quarter following a 4.9 percent decrease in the fourth quarter, core consumer prices, which exclude food and energy prices, rose 1.5 percent after a 0.9 percent increase in the previous three months.

Later this afternoon, the Federal Reserve is scheduled to announce the outcome of the two-day Federal Open Market Committee meeting. The FOMC is the Fed's policy-setting arm.

While the Fed is widely expected to leave interest rates unchanged, traders are likely to pay close attention to the accompanying statement, looking for indications of the Fed's future plans regarding the capital markets as well as its outlook for the economy.